MODULE 1 of benefit received.
The direct receipt or actual
INTRODUCTION TO TAXATION
What is Taxation?
-Taxation may be defined as a State power, a
legislative process, and a mode of government
cost distribution.
1. As a state power
Taxation is an inherent power of the State to
enforce a proportional contribution from its
subjects for public purpose.
2. As a process
Taxation is a process of levying taxes by the
legislature of the State to enforce proportional
contributions from its subjects for public purpose.
3. As a mode of cost distribution
Taxation is a mode by which the State allocates
its costs or burden to its subjects who are
benefited by its spending.
The Theory of Taxation
-Every government provides a vast array of
public services including defense, public order
and safety, health, education, and social
protection among others.
-A system of government is indispensable to
every society. Without it, the people will not relish
the benefits of a civilized and orderly society.
However, a government cannot exist without a
system of funding. The government's necessity
for funding is the theory of taxation.
The Basis of Taxation
-The government provides benefits to the people
in the form of public services, and the people
provide the funds that finance the government.
This mutuality support between the people and
the government is referred to as the basis of
taxation.
This mutuality is illustrated as follows:
Receipt of benefits is conclusively presumed
-Every citizen and resident of the State directly or
indirectly benefits from the public services
rendered by the government. These benefits can
be in the form of daily free usage of public
infrastructures, access to public health or
educational services, the protection and security
of person and property, or simply the comfort of
living in a civilized and peaceful society which is
maintained by the government.
While most public services are received
indirectly, their realization by every citizen and
resident is undeniable. In taxation, the receipt of
these benefits by the people is conclusively
presumed. Thus, taxpayers cannot avoid
payment of taxes under the defense of absence
availment of government services is not a
precondition to taxation.
THEORIES OF COST ALLOCATION
-Taxation is a mode of allocating government
costs or burden to the people. In distributing the
costs or burden, the government regards the
following general considerations in the exercise
of its taxation power:
1. Benefit received theory
2. Ability to pay theory
Benefit received theory
-The benefit received theory presupposes that
the more benefit one receives from the
government, the more taxes he should pay.
Ability to pay theory
-The ability to pay theory presupposes that
taxation should also consider the taxpayer's
ability to pay. Taxpayers should be required to
contribute based on their relative capacity to
sacrifice for the support of the government.
-In short, those who have more should be taxed
more even if they benefit less from the
government. Those who have less shall
contribute less even if they receive more of the
benefits from the government.
Aspects of the Ability to Pay Theory
1. Vertical equity
-Vertical equity proposes that the extent of one's
ability to pay is directly proportional to the level of
his tax base.
-For example, A has P200,000 income while B
has P400,000. In taxing income, the government
should tax B more than A because B has greater
income; hence, a greater capacity to contribute.
2. Horizontal equity
-Horizontal equity requires consideration of the
particular circumstance of the taxpayer.
-For example, Businessmen A and B both have
P300,000 income. A incurred P200,000 in
business expenses while B incurred only
P50,000 business expenses. The government
should tax B more than A because he has lesser
expenses and thus greater capacity to contribute
taxes.
Vertical equity is a gross concept while
horizontal equity is a net concept.
The Lifeblood Doctrine
-Taxes are essential and indispensable to the
continued subsistence of the government.
Without taxes, the government would be
paralyzed for lack of motive power to activate or
operate it. (CIR vs. Algue)
-Taxes are the lifeblood of the government, and
their prompt and certain availability are an
imperious need. Upon taxation depends on the Point of Taxation Police Eminent
government's ability to serve the people for Difference Power Domain
whose benefit taxes are collected. (Vera vs.
Exercising Governm Governme Governme
Fernandez) authority ent nt nt and
private
Implication of the lifeblood doctrine in entities
taxation:
1. Tax is imposed even in the absence of a Purpose For the To protect For public
support of the use
Constitutional grant.
the general
2. Claims for tax exemption are construed governme welfare of
against taxpayers. nt the people
3. The government reserves the right to
choose the objects of taxation. Persons Communi Communit Owner of
affected ty or class y or class the
4. The courts are not allowed to interfere with
of of property
the collection of taxes. individual individuals
5. In income taxation: s
a. Income received in advance is taxable
upon receipt. Amount of Unlimited Limited No
imposition amount
b. Deduction for capital expenditures and (Tax is (Impositio imposed.
prepayments is not allowed as it effectively based on n is limited
defers the collection of income tax. governme to cover (The
c. A lower amount of deduction is preferred nt needs) cost of governme
regulation) nt pays
when a claimable expense is subject to
just
limit.
compensa
d. A higher tax base is preferred when the tion)
tax object has multiple tax bases
Importanc Most Most Important
INHERENT POWERS OF THE STATE e important superior
-A government has its basic needs and rights Relationshi Inferior to Superior Superior
which co-exist with its creation. It has p with the the “Non- to the to the
rights to sustenance, protection, and properties. Constitutio impairme “Non- “Non-
The government sustains itself by the power of n nt impairmen impairmen
taxation, secures itself and the well-being of its Clause” t Clause” t Clause”
people by police power, and secures its own of the of the of the
properties to carry out its public services by the Constituti Constitutio Constitutio
on n n
power of eminent domain.
-These rights, dubbed as "powers" are natural, Limitation Constituti Public Public
inseparable, and inherent to every government. onal and interest purpose
No government can sustain or effectively operate inherent and due and just
without these powers. Therefore, the exercise of limitations process compensa
these powers by the government is presumed tion
understood and acknowledged by the people
from the very moment they establish their Similarities of the three powers of the State
government. These powers are naturally 1. They are all necessary attributes of
exercisable by the government even in the sovereignty.
absence of an express grant of power in the 2. They are all inherent to the state.
Constitution.
3. They are all legislative in nature.
4. They are all ways in which the State
The Inherent Powers of the State
interferes with private rights and properties.
1. Taxation power is the power of the
5. They all exist independently of the
State to enforce proportional
Constitution and are exercisable by the
contribution from its subjects to sustain
government even without a constitutional
itself.
grant. However, the Constitution may
2. Police power is the general power of
impose conditions or limits for their
the State to enact laws to protect the so
exercise.
well-being of the people.
6. They all presuppose an equivalent form of
3. Eminent domain is the power of the
compensation received by the persons
State to take private property for public
affected by the exercise of the power.
use after paying just compensation.

Comparison of the three powers of the State

 7. The exercise of this powers by the local
government units may be limited by the
national legislature.
SCOPE OF THE TAXATION POWER
-The power of taxation is the most absolute of all
the powers of the government.
a. Comprehensive – covers all (persons,
businesses, professions, right and
privileges)
b. Unlimited – In the absence of limitations
provided by the law or the constitution, the
power to tax is unlimited and
comprehensive. Its force is so searching to
the extent that the courts scarcely venture
to declare that it is subject to any
restrictions.
c. Plenary – it is complete; BIR may avail of
certain remedies to ensure collection of
taxes.
d. Supreme – in so far as the selection of the
subject of taxation
THE LIMITATIONS OF THE TAXATION
POWER
A. Inherent limitations
1. Territoriality of taxation
2. International comity
3. Public purpose
4. Exemption of the government
5. Non-delegation of the taxing power
B. Constitutional Limitations
1. Due process of law
2. Equal protection of the law
3. Uniformity rule in taxation
4. Progressive system of taxation
5. Non-imprisonment for non-payment of debt
or poll tax
6. Non-impairment of obligation and contract
7. Free worship rule
8. Exemption of religious or charitable entities,
non-profit cemeteries, churches and
mosque from property taxes
9. Non-appropriation of public funds or
property for the benefit of any church, sect
or system of religion
10. Exemption from taxes of the revenues and
assets of non-profit, non-stock educational
institutions
11. Concurrence of a majority of all members of
Congress for the passage of a law granting
tax exemption
12. Non-diversification of tax collections
13. Non-delegation of the power of taxation
14. Non-impairment of the jurisdiction of the
Supreme Court to review tax cases
15. The requirement that appropriations,
revenue, or tariff bills shall originate
exclusively in the House of Representatives
16. The delegation of taxing power to local
government units
ESSENTIAL ELEMENTS OF TAX
1. It is an enforced contribution.
2. It is generally payable in money.
3. It is proportionate in character.
4. It is levied on persons, property or rights.
5. It is levied by the law-making body of the
state.
6. It is levied for public purpose.
ASPECTS OF TAXATION
1. Levying or imposition of tax
2. Assessment and collection of tax
Levy or imposition
-This process involves the enactment of a tax law
by Congress and is called impact of taxation. It is
also referred to as the legislative act in taxation.
-Congress is composed of two bodies:
1. The House of Representatives, and
2. The Senate
-As mandated by the Constitution, tax bills must
originate from the House of Representatives.
Each may, however, have their own versions of a
proposed law which is approved by both bodies,
but tax bills cannot originate exclusively from the
Senate.
Matters of legislative discretion in the
exercise of taxation
1. Determining the object of taxation
2. Setting the tax rate or amount to be
collected
3. Determining the purpose for the levy which
must be public use
4. Kind of tax to be imposed
5. Apportionment of the tax between the
national and local government
6. Situs of taxation
7. Method of collection
Assesment and Collection
-The tax law is implemented by the
administrative branch of the government.
Implementation involves assessment or the
determination of the tax liabilities of taxpayers
and collection. This stage is referred to as
incidence of taxation or the administrative act of
taxation.
SITUS OF TAXATION
-Situs is the place of taxation. It is the tax
jurisdiction that has the power to levy taxes upon
the tax object. Situs rules serve as frames of
reference in gauging whether the tax object is
within or outside the tax jurisdiction of the taxing
authority.
Examples of Situs Rules:
 1. Business tax situs: Businesses are
subject to tax in the place where the
business is conducted.
Illustration
A taxpayer is involved in car dealership abroad
and restaurant operation in the Philippines.
- The restaurant business will be subject to
business tax in the Philippines since the
business is conducted herein, but the car
dealing business is exempt because the
business is conducted abroad.
2. Income tax situs on services: Service
fees are subject to tax where they are
rendered.
Illustration
A foreign corporation leases a residential space
to a non-resident Filipino citizen abroad.
- The rent income will be exempt from
Philippine taxation as the leasing service
is rendered abroad.
3. Income tax situs on sale of goods: The
gain on sale is subject to tax in the place of
sale
Illustration
While in China, a non-resident OFW citizen
agreed with a Chinese friend to sell his diamond
necklace to the latter. They stipulated that the
delivery of the item and the payment will be
made a week later in the Philippines. The sale
was consummated as agreed.
- The contract of sale is consensual and is
perfected by the meeting of the minds of
the contracting parties. The perfection of
the contract of sale is in China. The situs
of taxation is China. The gain on the sale
of the necklace will be taxable abroad
and exempt in the Philippines.
4. Property tax situs: Properties are taxable
in their location.
Illustration
An overseas Filipino worker has a residential lot
in the Philippines.
- He will still pay real property tax despite
his absence in the Philippines because
his property is located herein.
5. Personal tax situs: Persons are taxable in
their place of residence.
Illustration
Ahmed Lofti is a Sudanese studying medicine in
the Philippines.
- Ahmed will pay personal tax in the
Philippines even if he is an alien because
he is residing in the Philippines.
OTHER FUNDAMENTAL DOCTRINES IN
TAXATION
1. Marshall Doctrine - "The power to tax
involves the power to destroy." Taxation
power can be used as an instrument of police
power. It can be used to discourage or
prohibit undesirable activities or occupation.
As such, taxation power carries with it the
power to destroy.
-However, the taxation power does not include
the power to destroy if it is used solely for the
purpose of raising revenue (Roxas vs. CTA).
2. Holme's Doctrine - "Taxation power is not
the power to destroy while the court sits."
Taxation power may be used to build or
encourage beneficial activities or industries by
the grant of tax incentives.
-While the Marshall Doctrine and the Holme's
Doctrine appear to contradict each other, both
are actually employed in practice. A good
manifestation of the Marshall Doctrine is the
imposition of excessive tax on cigarettes while
applications of the Holme's Doctrine include the
creation of Ecozones with tax holidays and
provision of incentives, such as the Omnibus
Investment Code (E.O. 226) and the Barangay
Micro-Business Enterprise (BMBE) Law.
3. Prospectivity of tax laws
-Tax laws are generally prospective in operation.
An ex post facto law or a law that retroacts is
prohibited by the Constitution.
-Exceptionally, income tax laws may operate
retrospectively if so intended by Congress under
certain justifiable conditions. For example,
Congress can levy tax on income earned during
periods of foreign occupation even after the war.
4. Non-compensation or set-off
-Taxes are not subject to automatic set-off or
compensation. The taxpayer cannot delay
payment of tax to wait for the resolution of a
lawsuit involving his pending claim against the
government. Tax is not a debt; hence, it is not
subject to set-off. This rule is important to allow
the government sufficient period to evaluate the
validity of the claim. (See Philex Mining
Corporation vs. CIR, G.R. 125704)
Exceptions:
a. Where the taxpayer's claim has already
become due and demandable such as
when the government already recognized
the same and an appropriation for refund
was made
b. Cases of obvious overpayment of taxes
c. Local taxes
5. Non-assignment of taxes
-Tax obligations cannot be assigned or
transferred to another entity by contract.
Contracts executed by the taxpayer to such
 effect shall not prejudice the right of the
government to collect.
6. Imprescriptibility in taxation
-Prescription is the lapsing of a right due to the
passage of time. When one sleep on his right
over an unreasonable period of time, he is
presumed to be waiving his right. The
government's right to collect taxes does not
prescribe unless the law itself provides for such
prescription.
-Under the NIRC, tax prescribes if not collected
within 5 years from the date of its assessment. In
the absence of an assessment, tax prescribes if
not collected by judicial action within 3 years
from the date the return is required to be filed.
However, taxes due from taxpayers who did not
file a return or those who filed fraudulent returns
do not prescribe.
7. Doctrine of estoppel
-Under the doctrine of estoppel, any
misrepresentation made by one party toward
another who relied therein in good faith will be
held true and binding against that person who
made the misrepresentation.
-The government is not subject to estoppel. The
error of any government employee does not bind
the government. It is held that the neglect or
omission of government officials entrusted with
the collection of taxes should not be allowed to
bring harm or detriment to the interest of the
people. Also, erroneous applications of the law
by public officers do not block the subsequent
correct application of the same.
8. Judicial Non-interference
-Generally, courts are not allowed to issue
injunction against the government's pursuit to
collect tax as this would unnecessarily defer tax
collection. This rule is anchored on the Lifeblood
Doctrine.
9. Strict Construction of Tax Laws
-When the law clearly provides for taxation,
taxation is the general rule unless there is a clear
exemption. Hence the maxim, “Taxation is the
rule, exemption is the exception."
-When the language of the law is clear and
categorical, there is no room for interpretation.
There is only room for application. However,
when taxation laws are vague, the doctrine of
strict legal construction is observed.
-Vague tax laws
Vague tax laws are construed against
the government and in favor of the
taxpayers. A vague tax law means no
tax law. Obligation arising from law is
not presumed. The Constitutional
requirement of due process requires
laws to be sufficiently clear and
expressed in their provisions.
-Vague exemption laws
Vague tax exemption laws are construed
against the taxpayer and in favor of the
government. A vague tax exemption law
means no exemption law. The claim for
exemption is construed strictly against
the taxpayer in accordance with the
lifeblood doctrine.
-The right of taxation is inherent to the
State. It is a prerogative essential to the
perpetuity of the government. He who
claims exemption from the common
burden must justify his claim by the
clearest grant of organic or statute law.
(Iloilo, et al. vs. Smart Communications,
Inc., G.R. No. 167260, February 27,
2009)
-When exemption is claimed, it must be
shown indubitably to exist. At the outset,
every presumption is against it. A well-
founded doubt is fatal to the claim; it is
only when the terms of the concession
are too explicit to admit fairly of any
other construction that the proposition
can be supported. (Ibid)
-Tax exemption cannot arise from vague
inference. Tax exemption must be clear
and unequivocal. A taxpayer claiming a
tax exemption must point to a specific
provision of law conferring on the
taxpayer, in clear and plain terms,
exemption from a common burden. Any
doubt whether a tax exemption exists is
resolved against the taxpayer. (see
Digital Telecommunications, Inc. vs. City
Government of Batangas, et al)
DOUBLE TAXATION
-Double taxation occurs when the same taxpayer
is taxed twice by the same tax jurisdiction for the
same thing.
Elements of double taxation
1. Primary element: Same object
2. Secondary elements:
a. Same type of tax
b. Same purpose of tax
c. Same taxing jurisdiction
d. Same tax period
Types of Double Taxation
1. Direct double taxation
-This occurs when all the element of double
taxation exists for both impositions.
Examples:
 a. An income tax of 10% on monthly sales
and a 2% income tax on the annual sales
(total of monthly sales)
b. A 5% tax on bank reserve deficiency and
another 1% penalty per day as a
consequence of such reserve deficiency
2. Indirect double taxation
-This occurs when at least one of the secondary
elements of double taxation is not common for
both impositions.
Examples:
a. The national government levies business
tax on the sales or gross receipts of
business while the local government levies
business tax upon the same sales or
receipts.
b. The national government collects income
tax from a taxpayer on his income while
the local government collects community
tax upon the same income.
c. The Philippine government taxes foreign
income of domestic corporations and
resident citizens while a foreign
government also taxes the same income
(international double taxation).
-Nothing in our law expressly prohibits
double taxation. In fact, indirect double
taxation is prevalent in practice.
However, direct double taxation is
discouraged because it is oppressive
and burdensome to taxpayers. It is also
believed to counter the rule of equal
protection and uniformity in the
Constitution.
How can double taxation be minimized?
-The impact of double taxation can be minimized
by any one or a combination of the following:
a. Provision of tax exemption - only one tax
law is allowed to apply to the tax object
while the other tax law exempts the same
tax object
b. Allowing foreign tax credit - both tax laws
of the domestic country and a foreign
country tax the tax object, but the tax
payments made in the foreign tax law are
deductible against the tax due of the
domestic tax law
c. Allowing reciprocal tax treatment -
provisions in tax laws imposing a reduced
tax rates or even exemption if the country
of the foreign taxpayer also gives the
same treatment to Filipino non-residents
therein
d. Entering into treaties or bilateral
agreements - countries may stipulate for a
lower tax rates for their residents if they
engage in transactions that are taxable by
both of them.
ESCAPES FROM TAXATION
-Escapes from taxation are the means available
to the taxpayer to limit or even avoid the impact
of taxation.
Categories of Escapes from Taxation
A. Those that result to loss of government
revenue
1. Tax evasion, also known as tax dodging,
refers to any act or trick that tends to
illegally reduce or avoid the payment of tax.
Examples:
a. This can be achieved by gross
understatement of income, non-declaration
of income, overstatement of expenses or
tax credit.
b. Misrepresenting the nature or amount of
transaction to take advantage of lower
taxes.
2. Tax avoidance, also known as tax
minimization, refers to any act or trick that
reduces or totally escapes taxes by any
legally permissible means.
Examples:
a. Selection and execution of transaction that
would expose taxpayer to lower taxes.
b. Maximizing tax options, tax carry-overs or
tax credits
c. Careful tax planning
3. Tax exemption, also known as tax holiday,
refers to the immunity, privilege or freedom
from being subject to a tax which others are
subject to. Tax exemptions may be granted
by the Constitution, law, or contract.
All forms of tax exemptions can be
revoked by Congress except those
granted by the Constitution and those
granted under contracts.
B. Those that do not result to loss of
government revenue
1. Shifting - This is the process of transferring
tax burden to other taxpayers.
Forms of shifting
a. Forward shifting - This is the shifting of
tax which follows the normal flow of
distribution (i.e. from manufacturer to
wholesalers, retailers to consumers).
Forward shifting is common with
essential commodities and services
such as food and fuel.
b. Backward shifting - This is the reverse
of forward shifting. Backward shifting is
common with non-essential commodities
where buyers have considerable market
power and commodities with numerous
substitute products
 c. Onward shifting - This refers to any tax
shifting in the distribution channel that
exhibits forward shifting or backward
shifting.
-Shifting is common with business taxes
where taxes imposed on business
revenue can be shifted or passed-on to
customers.
2. Capitalization - This pertains to the
adjustment of the value of an asset caused
by changes in tax rates.
For instance, the value of a mining
property will correspondingly decrease
when mining output is subjected to
higher taxes. This is a form of backward
shifting of tax.
3. Transformation - This pertains to the
elimination of wastes or losses by the
taxpayer to form savings to compensate for
the tax imposition or increase in taxes.
Tax Amnesty
-Amnesty is a general pardon granted by the
government for erring taxpayers to give them a
chance to reform and enable them to have a
fresh start to be part of a society with a clean
slate. It is an absolute forgiveness or waiver by
the government on its right to collect and is
retrospective in application.
Tax Condonation
-Tax condonation is forgiveness of the tax
obligation of a certain taxpayer under certain
justifiable grounds. This is also referred to as tax
remission.
-Because they deprive the government of
revenues, tax exemption, tax refund, tax
amnesty, and tax condonation are construed
against the taxpayer and in favor of the
government.
Tax Amnesty vs. Tax Condonation
-Amnesty covers both civil and criminal liabilities,
but condonation covers only civil liabilities of the
taxpayer.
-Amnesty operates retrospectively by forgiving
past violations. Condonation applies
prospectively to any unpaid balance of the tax;
hence, the portion already paid by the taxpayer
will not be refunded.
-Amnesty is also conditional upon the taxpayer
paying the government a portion of the tax
whereas condonation requires no payment.
MODULE EXERCISES
True or False
1. There should be direct receipt of benefit
before one could be compelled to pay
taxes.
2. Eminent domain involves confiscation of
prohibited commodities to protect the
well-being of the people.
3. Horizontal equity requires consideration
of the circumstance of the taxpayer.
4. Taxes are the lifeblood of the
government.
5. Taxation is a mode of apportionment of
government costs to the people.
6. The exercise of taxation power requires
Constitutional grant.
7. Taxation is inherent in sovereignty.
8. Police power is the most superior power
of the government. Its exercise needs to
be sanctioned by the Constitution.
9. All inherent powers presuppose an
equivalent form of compensation.
10. The reciprocal duty of support between
the government and the people
underscores the basis of taxation.
11. The scope of taxation is regarded as
comprehensive, plenary, unlimited, and
supreme.
12. The Constitutional exemption of
religious, charitable, and non-profit
cemeteries, churches, and mosques
refers to income tax and real property
tax.
13. Taxpayers under the same circumstance
should be taxed differently.
14. Taxation is subject to inherent and
Constitutional limitations,
15. International comity connotes courtesy
between nations.
16. Collection of taxes in the absence of a
law is violative of the Constitutional
requirement for due process.
17. No one shall be imprisoned for non-
payment of tax.
18. The lifeblood doctrine requires the
government to override its obligations
and contracts when necessary.
19. 2/3 of all members of Congress is
required to pass a tax exemption law.
20. The government should tax itself.